dab article

8/13/2019 DAB Article

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Singapore International Arbitration Centrewww.siac.org.sg

32 Maxwell Road #02-01 Singapore 069115 T: (65) 6221 8833 F: (65) 6224 1882 E: [email protected]

ENFORCEMENT OF DAB DECISIONS UNDER FIDIC CONTRACTS:PITFALLS AND SOLUTIONS PT PERUSAHAAN GAS NEGARA (PERSERO) TBK v. CRW JOINT OPERATION[2010] SGHC 202Paul TeoConsultant of Hogan Lovells Lee & Lee, Singapore

Introduction

Those who are engaged in international project contracting will no doubt be familiar with the FIDICi forms ofcontracts and the requirement therein for disputes to be referred to a Dispute Adjudication Board ("DAB")iifor itsdecision in the first instance. One of the potentially difficult issues in this area relates to the enforcement of a DABdecision by means of arbitration. Many have found this issue problematic and it would appear to us that a large parof the problem may be due to the fact that the wording and significance of the relevant FIDIC provisions are notalways fully understood. In the recent decision of PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation[2010] SGHC 202("PGN case"), the Singapore High Court had the opportunity to consider this issue. This brief notewill touch upon the key aspects of the PGN case and highlight both the potential pitfalls posed by the language ofthe relevant FIDIC provisions and the practical solutions that may be adopted to avoid the problems.

Background of Case

Under a contract which was based upon the FIDIC Conditions of Contract for Construction (1st Edition, 1999) ("1999Red Book") but with modifications, PT Perusahaan Gas Negara (Persero) TBK ("PGN") engaged CRW Joint Operation("CRW") to design, procure, install, test and pre-commission a pipeline and an optical fibre cable in Indonesia("Contract"). While the Contract was being performed, a dispute arose between the parties over certain variationorder proposals and requests for payments submitted by CRW.

Pursuant to Clause 20.4 (see excerpts below)iii, the parties referred the dispute to a DAB which had been appointedThe DAB heard the dispute and made several decisions, all of which were accepted, save for one which required PGNto pay CRW the sum of US$17,298,834.57. In accordance with the Contract, PGN submitted a Notice ofDissatisfaction ("NOD") in respect of that decision. The matter remained unresolved and CRW subsequently brough

an arbitration against PGN in an attempt to enforce the DAB decision. Following a hearing which was conductedbefore an arbitral tribunal comprising three arbitrators, a majority final award was rendered holding that the DABdecision in question was binding and that PGN had an obligation to make immediate payment for the sum ofUS$17,298,834.57 to CRW.

CRW subsequently took out an application before the High Court of Singapore to register the award as a judgmentin Singapore. In response, PGN applied to Court to set aside the registration order. PGN also applied to Court to setaside the arbitral award pursuant to Section 24 of the Singapore International Arbitration Act and Article 34(2) of theUNCITRAL Model Law.


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The Decision

The Court found in favour of PGN and set aside the award which had been obtained by CRW under Article34(2)(a)(iii) of the UNCITRAL Model Law.

In reaching its decision, the Court discussed the fundamental distinction between an arbitration contemplatedunder Clause 20.6 and one contemplated under Clause 20.7, as follows:

Clause 20.7 is confined to that narrow category of cases where a DAB decision had become "final andbinding" - meaning that neither party had submitted an NOD after the receipt of the DAB decision and theunsuccessful party had failed to comply with that decision - and such a "final and binding" decision is

sought to be enforced against the non-complying party by means of arbitration. This provision does not

involve an enquiry into the merits of the DAB decision. There is a "lacuna" in that Clause 20.7 does not

confer any right on a successful party to bring an arbitration against an non-complying party for a DAB

decision that is merely "binding" (as opposed to "final and binding"); and

On the other hand, Clause 20.6 sets out the procedure for parties to bring a "fresh" arbitration which willbe decided on the merits. An arbitration under Clause 20.6 will have to be referred to a DAB in the first

instance for its decision.

The Court held that:

In seeking to enforce the DAB decision against PGN by means of arbitration, CRW had erroneouslyconflated the provisions of Clause 20.6 and Clause 20.7;

Given that an NOD had been submitted by PGN, the DAB decision in question was not "final and binding"(though it was "binding") and hence, Clause 20.7 did not apply;

The real dispute was whether the DAB decision in question was correct and consequent to that, whetherCRW was entitled to payment of the amount that the DAB had decided was due and payable by PGN. CRW

however tried to limit the dispute to whether payment of the said sum should be made immediately and inso doing, CRW wrongly relied on Clause 20.6 and failed to satisfy the following requirements under Clause

20.6:

- the matter had to be referred to the DAB for its decision in the first instance;

- the arbitral tribunal (which is vested with the "full power" under Clause 20.6 to "open up, reviewand revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any


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decision of the DAB, relevant to the Dispute") had to review the merits of the DAB decision andthen either confirm or revise the correctness of that decision;

In the circumstances, given that neither of the above requirements had been met, the majority tribunalhad exceeded its powers by rendering a final award on a dispute which had not been referred to the DAB

for its decision and which was outside of the scope of the parties' arbitration agreement as contained in

the Contract. Accordingly, the majority award was set aside under Article 34(2)(a)(iii) of the UNCITRAL

Model Law; and

The Court also held, obiter that it would be possible for a successful party such as CRW to rely upon Clause20.6 to obtain an interim or provisional award, pending a final determination of the dispute at large, as a

means of enforcement. On the facts, however, CRW had not sought an interim or provisional award and

the majority tribunal had also proceeded to render a final award in the matter.

Commentary

The PGN case provides a timely reminder of the fundamental yet often overlooked distinction between Clause20.6 and Clause 20.7. Whether a DAB decision should be enforced by means of arbitration under Clause 20.6 orClause 20.7 will depend entirely on whether a valid NOD had been submitted and consequently, whether the DABdecision is "final and binding" (no NOD submitted) or merely "binding" (valid NOD submitted).

To summarise the position, a DAB decision may be enforced by means of arbitration under a FIDIC contract in oneof two ways:

Where the DAB decision is "final and binding", the party seeking to enforce the decision has to bring anarbitration against the non-complying party under Clause 20.7. The arbitral tribunal will not be required to

review the merits of the DAB decision; and

Where the DAB decision is merely "binding", the party seeking to enforce the decision has to bring anarbitration against the non-complying party under Clause 20.6. The arbitral tribunal must be asked to

review the merits of the DAB decision and then either to confirm or revise that decision.

As can be seen from the PGN case, it is critical to ensure that the DAB decision is enforced by arbitration under thecorrect provision, so that the eventual award will be less susceptible to being challenged by the unsuccessful partyand set aside by the Court.

For drafting purposes, it should be noted that the wording of Clause 20.7 of the 1999 Red Book (specifically theterm "final and binding") has been retained in both the FIDIC Multilateral Development Bank Harmonised Editionforms published in 2005 (as amended in 2006) and 2010. To avoid the problem posed by "final and binding"


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requirement, the wording of Clause 20.7 (or the corresponding provisions) could be amended so as to exclude the"final and binding" requirement altogether. One way to do this would be adopt the wording used under the FIDICConditions of Contract for Design, Build and Operate Projects (1st Edition, 2008) ("the Gold Book"), whichprovides as follows:

"In the event that a Party fails to comply with any decision of the DAB, whether binding or final andbinding, then the other Party may, without prejudice to any other rights which it may have, refer thefailure itself to arbitration under [Clause 20.8] for summary or other expedited relief, as may beappropriate." (bold emphasis added)

Finally, and as mentioned above, even if the "final and binding" requirement has been retained, it remains open fothe successful party to rely upon Clause 20.6 to obtain an interim or provisional award, pending a finadetermination of the dispute at large. CRW did not pursue this option in the PGN case, but this is an approach thatcan potentially be adopted to overcome the "final and binding" requirement imposed by the wording of Clause20.7.

iFdration Internationale des Ingnieurs-Conseils: the International Federation of Consulting Engineers.

iiAlso termed "Dispute Board" in some of the FIDIC contracts.

iiiExcerpts from the 1999 Red Book as follows, with bold emphasis added:

"20.4 Obtaining Dispute Adjudication Boards Decision

If a dispute (of any kind whatsoever) arises between the Parties in connection with, or arising out of, the Contract or the execution of the

Works, including any dispute as to any certificate, determination, instruction, opinion or valuation of the Engineer either Party may refer the

dispute in writing to the DAB for its decision, with copies to the other Party and the Engineer. Such reference shall state that it is given

under this Sub-Clause.

Within 84 days after receiving such reference, or within such other period as may be proposed by the DAB and approved by both Parties,

the DAB shall give its decision, which shall be reasoned and shall state that it is given under this Sub-Clause. The decision shall be binding on

both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award as

described below. Unless the Contract has already been abandoned, repudiated or terminated, the Contractor shall continue to proceed

with the Works in accordance with the Contract.

If either Party is dissatisfied with the DABs decision, then either Party may, within 28 days after receiving the decision, give notice to the

other Party of its dissatisfaction. If the DAB fails to give its decision within the period of 84 days (or otherwise approved) after receiving

such reference, then either Party may, within 28 days after this period has expired, give notice to the other Party of its dissatisfaction.


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In either event, this notice of dissatisfaction shall state that it is given under this Sub-Clause, and shall set out the matter in dispute and the

reason(s) for dissatisfaction. Except as stated in Sub-Clause 20.7 [Failure to Comply with Dispute Adjudication Boards Decision] and Sub-

Clause 20.8 [Expiry of Dispute Adjudication Boards Appointment] neither Party shall be entitled to commence arbitration of a dispute unless

a notice of dissatisfaction has been given in accordance with this Sub-Clause.

If the DAB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party

within 28 days after it received the DABs decision, then the decision shall become final and binding upon both Parties."

"20.6 Arbitration

Unless settled amicably, any dispute in respect of which the DAB s decision (if any) has not become final and binding shall be finally settled

by international arbitration. Unless otherwise agreed by both Parties:

(a) the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,

(b) the dispute shall be settled by three arbitrators appointed in accordance with these Rules, and

(c) the arbitration shall be conducted in the language for communications defined in Sub-Clause 1.4 [Law and Language].

The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of

the Engineer, and any decision of the DAB, relevant to the dispute. "

"20.7 Failure to Comply with Dispute Adjudication Boards Decision

In the event that:

(a) neither Party has given notice of dissatisfaction within the period stated in Sub-Clause 20.4 [Obtaining Dispute Adjudication BoardsDecision],

(b) the DABs related decision (if any) has become final and binding, and

(c) a Party fails to comply with this decision,

then the other Party may, without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6

[Arbitration], Sub-Clause 20.4 [Obtaining Dispute Adjudication Boards Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to

this reference."

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